Changes to the East Baton Rouge Parish employee retirement system are on the way after a report identified practices that run afoul of Internal Revenue Service rules that govern retirement systems.
A city-parish policy lets city-parish employees return to full-time jobs while getting paid for 29 hours of work a week and collecting their retirement benefits.
Changes to this “retire/rehire” system have previously been resisted by Metro Council out of fears it would drive high-profile staff from their jobs, but a December 2020 report from the retirement system’s actuary spurred action when it indicated the current practices may be out of compliance with IRS guidelines, said Marsha Hanlon, chair of the East Baton Rouge Employees’ Retirement System Board of Trustees.
“Above all else, we do not want to do anything that’s going to harm the system,” Hanlon said during a Thursday board meeting to discuss the proposed changes. “That has been our goal since Day 1: to do the minimum required to get us in compliance because we feel we’re not in compliance now.”
Only employees using this system who are below the city-parish’s normal retirement age of 59½ are likely to be affected by changes the board is considering, according to Thursday’s discussion. There are only 13 employees who are retire/rehires below the normal retirement age, according to city-parish spokesman Mark Armstrong.
The retire/rehire employees under the normal retirement age face changes to how they receive their retirement benefits and the number of hours they work because IRS regulations do not allow for an employee to retire with the understanding they’ll be immediately rehired, while also receiving their full retirement benefits without a reduction, according to the actuary report from Foster & Foster, Inc.
The retirement benefits system, which is partially funded by taxpayers, “creates incentive to retire when first eligible to receive two checks, which result(s) in longer pension pay-out periods and drives up plan costs,” the report reads.
Hanlon told the board that the system faces a “very rare risk of penalties” if the issues aren’t addressed.
“The system isn’t going to come crashing down or anything,” Hanlon said.
While the solutions are still in the works, board members discussed implementing a waiting period of at least 90 days before an employee can return to work after retiring, although some board members floated a waiting period as long as 12 months. Those who return to work after retiring could also see their paid hours fall to as low as 25% and take a cut in the amount of retirement benefits they receive in order to come into compliance with the IRS.
The city-parish Deferred Retirement Option Plan, called DROP, which allows employees to lock in the calculation for monthly payments for the rest of their lives prior to retiring, may also face some changes. Employees are currently given a “lump sum distribution” from their account when they opt against separating, but the board will likely recommend those funds now stay on deposit until the employee officially retires, Hanlon said.
The IRS rules state that an employee can’t access their pension or DROP account until they reach the normal retirement age of 59½, something that is currently allowed and will also likely be recommended for changes by the Metro Council, Hanlon said.
The proposed changes are still being debated by the board, but Hanlon said she expects them to be sent to Metro Council for approval by the end of the year.
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Mayor-President Sharon Weston Broome's office is aware of the ongoing debate and said the proposed changes would be presented to Metro Council once they are approved by the board, Armstrong said in a statement.
"Once we have the necessary information, we will propose the necessary changes that will meet all federal guidelines and provide the necessary funding for the system," Armstrong wrote.
City-parish officials declined to provide a list of the 13 employees, but said their current salaries with the reduced hours average to $56,858. Their average full salaries prior to retirement calculate to roughly $78,425.
Councilwoman Chauna Banks, who supported the 2018 plan to do away with the retire/rehire system, said it’s largely used by employees high in the city-parish government.
“The persons who would have been impacted were persons who were longterm city workers who had collaborated, worked with and gained friendships with those of us on the council,” Banks said. “Instead of us being able to look at something that seemingly made sense, would have been financially beneficial to us and caused all of these issues in the employee realm, favoritism took precedent.”
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Three department directors were named as retire/rehires during the 2018 debate, including Hanlon, who worked as the finance director at that time.
The upcoming debate on changes to the retirement system may be an opportunity to revisit the 2018 discussion, Banks said. At the time, opponents of the retire/rehire system said it’s based on favoritism and causes stagnation for employees lower in departments seeking to move up.
While the retirement system board debates its recommendations, some of its proposals may already be unlikely to sail through the full council. Hanlon recommended a year-long grace period for the 13 employees who could be affected by changes to the retire/rehire system, something Banks said she’s not sure she’s in favor of.
“It would help the person, but on the same token, are we showing favoritism based on personalities and where they rank in the system?” Banks asked. “Persons who have less seniority or exposure to those of us on the council don’t have that benefit.”